PARIS—The leaders of France and Germany said Tuesday they would propose electing a permanent head of the euro zone to shore up governance of the monetary union, but stopped short of more fundamental steps toward refashioning the area into a federal entity with its own debt agency."We want to state our absolute will to defend the euro," said French President Nicolas Sarkozy after a meeting in Paris with German Chancellor Angela Merkel. The debt crisis that left Greece, Ireland and Portugal seeking financial assistance from the European Union and the International Monetary Fund has exposed fundamental flaws in the euro-zone construction: 17 countries share the same currency but have limited oversight over each other's budget spending policies. As a result, a profligate nation can run into budget woes and damage trust in the common currency. Market jitters have recently spread to Italy and Spain, where governments now rely on assistance from the European Central Bank to raise debt at affordable costs. Investor attention has also moved toward the core of the euro zone, with economic growth stalling in Germany and France in the second quarter and questions being raised about the financial health of the large French banks and of France's own triple-A credit rating. Some economists say the time has come to recast the architecture of the euro zone and accelerate the pace toward deeper fiscal integration by creating a single entity that can issue debt on a euro-zone level and keep a tight leash on national finances. The entity would mirror the ECB in a similar fashion to the Federal Reserve's relationship with the U.S. Treasury. The Franco-German tandem, which has a track record of finding breakthroughs at times of gridlock in the region, both said they were convinced that the euro zone must move toward deeper integration but added that it was too early to introduce euro-zone bonds. Mr. Sarkozy said any such move would have to "crown" the euro-zone integration process, but couldn't constitute a foundation. 
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Wednesday, August 17, 2011
PARIS—The leaders of France and Germany said Tuesday they would propose electing a permanent head of the euro zone to shore up governance of the monetary union, but stopped short of more fundamental steps toward refashioning the area into a federal entity with its own debt agency."We want to state our absolute will to defend the euro," said French President Nicolas Sarkozy after a meeting in Paris with German Chancellor Angela Merkel. The debt crisis that left Greece, Ireland and Portugal seeking financial assistance from the European Union and the International Monetary Fund has exposed fundamental flaws in the euro-zone construction: 17 countries share the same currency but have limited oversight over each other's budget spending policies. As a result, a profligate nation can run into budget woes and damage trust in the common currency. Market jitters have recently spread to Italy and Spain, where governments now rely on assistance from the European Central Bank to raise debt at affordable costs. Investor attention has also moved toward the core of the euro zone, with economic growth stalling in Germany and France in the second quarter and questions being raised about the financial health of the large French banks and of France's own triple-A credit rating. Some economists say the time has come to recast the architecture of the euro zone and accelerate the pace toward deeper fiscal integration by creating a single entity that can issue debt on a euro-zone level and keep a tight leash on national finances. The entity would mirror the ECB in a similar fashion to the Federal Reserve's relationship with the U.S. Treasury. The Franco-German tandem, which has a track record of finding breakthroughs at times of gridlock in the region, both said they were convinced that the euro zone must move toward deeper integration but added that it was too early to introduce euro-zone bonds. Mr. Sarkozy said any such move would have to "crown" the euro-zone integration process, but couldn't constitute a foundation. 
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The leaders said their finance ministers will propose in September a plan to European institutions for a tax on financial transactions, and they also said they would make proposals to align corporate-tax regimes between France and Germany. "We want France and Germany to move closer in terms of fiscal integration," Ms. Merkel said.
Also, finance ministers from both countries will get together twice a year to make sure that the hypotheses underlying the presentations of their respective budgets are consistent.
"France and Germany must converge, the status quo is impossible," said Mr. Sarkozy.
The two countries will also push for all 17 euro-zone members to adopt a "golden rule"—the obligation to balance their public finances—before next summer.
The Franco-German proposals will be included in a letter to be sent to Mr. Van Rompuy on Wednesday. In turn, Mr. Van Rompuy will sound out other euro-zone members.
Traders reacted with exasperation as Angela Merkel and Nicolas Sarkozy repeated their "absolute will to defend the euro" and "shore up investor confidence" yet refused to back the shattered currency with eurobonds or a bigger bail-out fund. The failure to address the two measures left many traders ruing what they see as a lack of political leadership.
Edward Meir from MF Global in New York said: "It doesn't look like the two biggest items were seriously discussed -- the potential for a eurobond and the size of the stabilization/bailout fund. At €450bn [the European Financial Stability Facility] could easily be wiped out if one of the larger countries gets into trouble."
Phil Flyn from PFG Best in Chicago said: "The market was holding out hope that we would be closer to a eurobond... What we're moving towards is more uncertainty."
European markets fell before the crisis talks had finished as data showed that Germany's economy had almost stalled. Second quarter growth figures showed that the powerhouse of Europe grew 0.1pc - far below expectations. The national statistics agency said that the "dynamism in the German economy has cooled significantly."
The DAX fell 0.5pc, France was down 0.3pc but the FTSE100 crept up 0.1pc as Fitch confirmed America's AAA credit rating. The euro fell against the dollar and gold soared - more than $20 in one hour - to $1780 an ounce as investors fled to the traditional safe haven.
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